Late Payment of Invoices (1998)

Definitions

Updated: Late Payment of Invoices (2002)

What is meant by a small business, a large business and a public sector body?

A small business has up to 50 employees, a large business has over 50 employees and a public sector body is a Government department, local or public authority.

Does the legal status of the business matter?

No. The Act applies to all types of businesses such as sole proprietor, partnerships and limited liability companies.

What is the definition of a ‘late payment?’

Usually companies have an agreed credit period which is outlined in their contract with customers. It may be written down or just a verbal agreement. When a payment is made after this agreed period of time, then it is considered to be late. If no specific credit period has been laid down or a contract does not exist, then the Act sets an automatic default time of 30 days. After this time has elapsed, interest may be applied. The 30-day default period runs from the later of these two actions:- the day when the goods are delivered or the service performed, or the day on which the purchaser is advised of how much the debt is.

Does the debt have to be a certain amount before interest can be claimed?

There is no minimum level of debt.

How do I tell clients that I will charge them interest if they pay late?

The Act should be incorporated as part and parcel of your standard business practices and credit management techniques. For example, when you tell the customer your payment terms and conditions you can also add that interest will be charged on overdue invoices in line with the Act. In addition to any verbal communication, you should clearly explain your procedures on any correspondence such as credit application forms, order confirmations, invoices and contracts. The Better Payment Practice Campaign suggests the following:

"We understand and will exercise our statutory right to interest under the Late Payment of Commercial Debts (Interest) Act 1998 if we are not paid according to agreed credit terms."

Do I have to charge interest when people pay late?

No. The statutory right is not compulsory. It’s your choice whether you decide to claim or not.

Is there another way to prevent paying late, without resorting to the law?

No. Both parties can agree their own terms to avoid late payment. This is called contractual interest. However, to stop purchasers taking advantage of the situation, any contractual solution for late payment must be ‘substantial’, otherwise it will be declared void and the debtor will be unable to rely on it. The term ‘substantial’ is seen as: 1) enough to compensate the supplier for the cost of late payment or to deter late payment or 2) fair and reasonable in the circumstances to allow the remedy to replace or vary the statutory right to interest provided by the Act.

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